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January 25th, 2011

Colorado Bill Would Eliminate Phantom Damages

Colorado legislators introduced a bill last Friday that would correct a state supreme court ruling that results in awards that significantly overcompensate plaintiffs and their attorneys in personal injury lawsuits.

The court decision, which received a Dishonorable Mention in the 2010-11 Judicial Hellholes report, entitles plaintiffs to recover the “sticker price” of the medical services billed by healthcare providers, rather than the amount actually paid by the patient or by an insurer on the plaintiff’s behalf. There is often a significant gap between the amounts, which reflects lower rates that are routinely negotiated by private insurers, Medicare, and Medicaid. These amounts, which only exist on the original bill and no one pays, are known as “phantom damages.”

For example, a hospital may charge $1,500 for an MRI, but the actual amount paid for that MRI might be $500. The plaintiff may have paid a $25 co-pay and the insurer paid the remaining $475. Yet, in litigation, the defendant is often required to pay the full $1,500 to the plaintiff — $1,000 more than anyone ever paid — simply because that amount was printed on the original bill.

“[T]he Colorado Supreme Court’s interpretation of this section in Volunteers of America v. Gardenswartz, 242 P.3d 1080 (2010), is contrary to the General Assembly’s intent to prevent compensatory damage awards for medical expenses from exceeding the amount accepted by the health care service provider for treating the injured party for reasonable and necessary health care services,” the bill’s findings state.

It is enormously wasteful for defendants to over-compensate plaintiffs for their medical bills. These costs are invariably passed on to consumers as higher prices for goods and services, including health care.